SEBI to bring Initial Coin Offerings using crypto currencies under its lens

The capital market regulator Securities and Exchange Board of India (SEBI) is planning to bring Initial Coin Offerings (ICO) under its existing legal framework. In recent times, popularity of crypto currencies has increased rapidly and number of entities looking at raising funds through ICO.

Background

Crypto currencies like bitcoin, ethereum and such offerings have been under government radar for long time. Even discussions were held between various regulatory bodies, including SEBI and Reserve Bank of India (RBI) to regulate crypto currencies. The RBI is of the view that these instruments are securities and so SEBI should be the regulating body. But these crypto-currencies are neither ‘commodities derivatives’ nor ‘securities’ under Securities Contracts (Regulation) Act, 1956.

Initial Coin Offering (ICO)

ICO is an unregulated means of crowd funding for project via use of cryptocurrency such as Bitcoin, Ethereum, Monero, DASH, Litecoin, Z-cash etc. It is like an equity initial public offer (IPO) where right of ownership or royalties of project is offered to investors in form of digital coins in exchange for legal tender or other cryptocurrencies.

ICO is mostly used to raise funds by start-up firms dealing in block chain technology and virtual currencies. Unlike an IPO, which is governed by SEBI regulations, there is no regulator for this kind of crowd sourcing in India. China’s Central Bank recently had banned ICO as dubbed it as an illegal public finance mechanism used for issue of securities and money laundering.

Crypto Currencies

Crypto Currencies or Virtual Currencies are type of unregulated digital money. They are mainly peer-to-peer system, and transacted between users directly, without an intermediary. These transactions are verified by network nodes and recorded in public distributed ledger called blockchain.

They are neither issued by central bank/public authority, nor is necessarily attached to fiat currency, but is used and accepted among the members of a specific virtual community. They are being transferred, stored or traded electronically.